In the midst of volatile trading, the dollar saw a slight increase on Thursday, following the release of underwhelming U.S. producer prices for March. However, this did not ease worries about ongoing inflation, further solidifying the likelihood that the Federal Reserve will postpone any potential interest rate cuts in 2024.
On Thursday, Federal Reserve officials reiterated the importance of a cautious approach when it comes to adjusting monetary policy, resulting in a strengthening of the dollar.
According to the data released on Thursday, the PPI for March increased by 0.2% from the previous month, falling short of the economists' forecast of 0.3% as per Reuters. The year-on-year comparison also showed a slightly lower rise of 2.1% compared to the estimated 2.2% gain.
The value of the American currency declined following the release of the PPI report, but it has since recovered.
According to a distinct report, the number of initial jobless claims in the U.S. for the week ending on April 6 was 211,000, slightly lower than the predicted 215,000. This indicates that the job market remains tight. Despite this, investors were more concerned with inflation, resulting in minimal impact on the value of the dollar.
The PPI report was published after the release of the CPI on Wednesday, which showed a higher increase than expected. In March, the U.S. CPI increased by 0.4% monthly, exceeding the predicted 0.3% rise.
According to Thierry Albert Wizman, a global FX and rates strategist at Macquarie in New York, the CPI has caused significant harm to the potential for a rate cut to occur sooner. He added that in order to prolong three more months of low inflation, they may have to tolerate this situation and delay the potential cut.
We may have to live with that in order to get three more months of low inflation and that means a cut is delayed.
Thierry Albert Wizman
During afternoon trading, the US dollar remained unchanged against the Japanese yen at 153.23 yen, following a dip below 153 yen due to the PPI results. Prior to this, the dollar had reached a new peak of 153.32 yen, its highest in 34 years.
Yen's recent decrease in value
There are also concerns about potential intervention due to the yen's recent decrease in value compared to the dollar. Japanese authorities have restated their stance of being willing to take action in response to significant fluctuations.
In the year 2022, the Japanese government stepped in three times in the currency market to prevent the yen from reaching a 32-year low of 152 against the dollar.
The USD index, which gauges the strength of the US currency against six key currencies, increased by 0.1% to reach 105.26. However, the dollar recorded a 0.3% decrease against the Swiss franc, falling to 0.9098 francs.
Moreover, the CME's FedWatch tool has indicated that the U.S. rate futures market has incorporated a 69% probability of a Fed rate reduction in September, in response to the PPI data.
This prediction was formed following the release of the consumer price index for the previous month, which was higher than anticipated. The market had been anticipating a rate cut in June for several weeks.
The possibility of rate cuts of 25 basis points (bps) this year has decreased according to fed fund futures, with the estimated number now being fewer than two, or approximately 42 bps. This is a decrease from the previous estimate of three or four rate cuts just a few weeks ago.
According to Karl Schamotta, chief market strategist at Corpay in Toronto, the market's expectations for interest rates have not changed significantly since yesterday, and the large differences in rates are keeping the U.S. dollar strong.
Market-implied rate expectations haven't budged materially from yesterday's levels and extraordinarily wide rate differentials are keeping the U.S. dollar elevated.
Karl Schamotta
The euro, on the other hand, has fallen 0.1% against the dollar to $1.07026, reaching a two-month low of $1.0699 after the European Central Bank announced they would maintain their record high interest rate of 4%, but hinted at a potential future cut.
Meanwhile, the Federal Reserve in the U.S. has indicated that they are not planning on immediately reducing rates.
New York Fed President John Williams stated that while the central bank has made progress in lowering inflation, they do not currently see a need for a looser monetary policy due to the unpredictable fluctuations in inflation.
Richmond Fed President Thomas Barkin, who has a vote on the Fed's policy-setting committee this year, shared a similar sentiment, stating that recent data has not increased his confidence in a widespread decrease in price pressures throughout the economy.